P.

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On the well established thinking as to why a single derivative action is maintainable, there is no
reason why a multiple derivative action is not. Per Mr Justice Bokhary PJ and Mr Justice
Chan PJ in the CFA

Shareholder May Sue on Behalf of the Company Under Limited Circumstances
As mentioned in our previous newsletter: Can a Shareholder Sue on Behalf of a Company (posted
at www.onc.hk/pub/oncfile/publication/litigation/0808_EN_Statutory_Derivative_Action.pdf),
shareholders may under limited circumstances sue for wrongs done to their company on the
companys behalf by way of derivative action. However, it has not been clear in the past whether a
person who is not a shareholder in the company but a shareholder in its parent or ultimate holding
company can bring a derivative action. Such an action has been described, conveniently but
somewhat misleading, as a double or multiple derivative action. In this article, the expression
multiple derivative action is used to embrace both double and multiple derivative actions.

No Multiple Derivative Action under the Existing Statutory Regime
In 2005, a statutory derivative action (SDA) was introduced in Hong Kong. Under the newly
added section 168BC of the Companies Ordinance (Cap. 32) (the Ordinance), an SDA only
applies to proceedings brought by a member of a company. The statutory regime hence does not
provide for a multiple derivative action. However, ones right to bring a derivative action at
Can Shareholder of Parent Company
Sue on Behalf of its Subsidiary?
The Hong Kong Court of Final Appeal (the CFA) clarified in Waddington Limited v Chan
Chun Hoo Thomas and Others (FACV No. 15 of 2007) that a shareholder of a parent company
may sue on behalf of its subsidiary in respect of wrongdoings committed against the subsidiary.
This is the first reasoned decision on multiple derivative actions in a common law jurisdiction
outside the USA.
Civil & Commercial Litigation November 2008

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6.5%
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common law (CDA), which is expressly preserved in the introduction of SDA, remains a venue
to argue for a multiple derivative action.

Waddington Limited v Chan Chun Hoo Thomas and Others (FACV No. 15 of 2007)
The proceeding of this case was commenced in 2003, hence
the SDA was not applicable. The Plaintiff Waddington Ltd
(Waddington) is a minority shareholder of Playmates
Holdings Limited (Playmates), of which Playmates
International Limited (Playmates International) is its
wholly-owned subsidiary. Playmates International has two
wholly-owned subsidiaries: Profit Point Limited (Profit
Point) and Autoestate Properties Limited (Autoestate).
The primary issue in this case is whether Waddington may
bring a derivative action on behalf of Profit Point and
Autoestate regarding alleged wrongs inflicted on them. The
alleged wrongdoer, Thomas Chan, has been effectively in
control at every level of the corporate chain, and allegedly he
would not allow the companies to sue himself.

The CFA, having regard to the potential injustice which would result if a derivative action were not
available where the company is controlled by the alleged wrongdoers, unanimously held that a
multiple derivative action is in fact available at common law.

Double Recovery Precluded by Reflective Loss Doctrine
In the Court of First Instance, Waddington had formulated its action solely as a derivative action on
behalf of Playmates. As the claims advanced were merely reflective of the alleged losses of
Playmates subsidiaries Profit Point and Autoestate, they were precluded by the reflective loss
doctrine and liable to be struck out. Nevertheless, since a derivative action on behalf of Profit Point
was in principle available and was prima facie sustainable on the facts pleaded, Barma J granted
Waddington an opportunity to reconstitute its pleading to accord with the principle. CFA upheld
Barma Js finding and allowed Waddington to continue the proceedings as a multiple derivative
action on behalf of Profit Point.
Waddington
Playmates
Playmates International
Profit Point Autoestate

Published by ONC Lawyers 2008
P. 3
IMPORTANT:
The law and procedure on this subject are very specialized and complicated. This article is just a very general
outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or
assistance is needed, please contact our solicitors.
CFA Clarifies Threshold Requirement in CDA
In addition, while minority shareholders are required to seek leave of
the Court to bring a SDA, leave is not required for a CDA. However,
the CFA has clarified that in either case, the minority shareholders
have to show a prima facie case before they could proceed, reversing
the finding of the Court of Appeal that at common law a plaintiff in a
derivative action is not required to establish a prima facie case.

CFA Recommends Changes to Law
The CFAs judgment does not extend the SDA to multiple derivative
action. Minority shareholders who wish to bring a multiple
derivative action must do so at common law. However, they cannot
enjoy the new statutory right to inspect the company's record, nor
can they bring a claim if the alleged wrongdoing does not fall within
the narrow meaning of fraud on minority. The CFA opined in
Waddington that the co-existence of SDA and CDA is merely a
source of confusion and complication. It is hoped that there will be
legislative change in due course creating a statutory mechanism for
multiple derivative actions. The legislature is also invited to
reconsider whether it is really sensible to maintain two parallel
regimes with different threshold tests, one requiring leave and the
other not.

For enquiries:
Please contact members
of our Civil & Commercial
Litigation Practice Group


Ludwig Ng
Senior Partner
+(852) 2107 0315
ludwig.ng@onc.hk

Sherman Yan
Partner, Head of Civil &
Commercial Litigation
Practice Group
+(852) 2107 0343
sherman.yan@onc.hk











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